Diversifying Into Education, Healthcare, And Government Will Strengthen Future Revenue

Key Takeaways

• Diversification into education, healthcare, and government sectors is poised to enhance future revenue, reducing dependency on a single market.
  
• Emphasis on hybrid work environments and operational efficiency initiatives suggest a well-positioned strategy for revenue growth and improved net margins.
  
• Steelcase faces revenue and margin pressures from project delays, soft international demand, rising costs in diversification, ERP system risks, and operational efficiency challenges.

Catalysts

Provides a portfolio of furniture and architectural products and services in the United States and internationally.

• Diversification into new market segments such as education, healthcare, and government, indicated by order growth across these segments, is likely to boost future revenue streams. This approach reduces reliance on any single market segment, potentially increasing overall demand for Steelcase's offerings.
  
• Emphasis on hybrid work environments, shown by adapting physical spaces to new work realities and gaining insight from ongoing Steelcase-led research, suggests that Steelcase is well-positioned to capture increased demand in the office furniture sector, positively impacting revenue.
  
• Operational efficiency initiatives, such as moving production lines to increase efficiency and closing a distribution center to optimize the network, demonstrate a clear path towards improved net margins through reduced operating costs.
  
• Investment in human-centered design research and development to drive innovation in product offerings matches well with evolving workplace needs, which could lead to enhanced revenue through differentiated and high-demand products.
  
• Commitment to sustainability and community involvement, highlighted by the annual impact report, aligns with growing consumer and corporate emphasis on corporate social responsibility. This focus could enhance brand reputation and loyalty, leading to increased sales and potentially higher net margins from premium product offerings.

Assumptions

• Analysts are assuming Steelcase's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.9% today to 3.7% in 3 years time.
• Analysts expect earnings to reach $130.6 million (and earnings per share of $1.1) by about December 2027, up from $121.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.4x on those 2027 earnings, up from 12.2x today. This future PE is lower than the current PE for the US Commercial Services industry at 31.0x.
• Analysts expect the number of shares outstanding to grow by 1.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.25%, as per the Simply Wall St company report.

Risks

• The reliance on significant projects from large corporate customers for order growth in the Americas, as any delay or decrease in these could affect revenue and profitability.
  
• A soft demand environment in international markets, excluding India, could limit revenue growth and margin expansion opportunities in those regions.
  
• Increasing costs associated with investments in diversification and growth initiatives across education, healthcare, and government and small to medium-sized businesses could pressure net margins if revenue growth does not meet expectations.
  
• The upcoming ERP system cutover may disrupt operations, potentially affecting customer shipments and thus impacting short-term revenues and earnings.
  
• The challenge of maintaining operational efficiency and cost reductions to support gross margin improvement, especially as the company scales its diversification efforts, which could impact net margins if not effectively managed.

Valuation

• The analysts have a consensus price target of $16.5 for Steelcase based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.5 billion, earnings will come to $130.6 million, and it would be trading on a PE ratio of 18.4x, assuming you use a discount rate of 7.2%.
• Given the current share price of $13.05, the analyst's price target of $16.5 is 20.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.